United States of America v. Medical Mutual of Ohio; Proposed Final Judgment and Competitive Impact Statement

DEPARTMENT OF JUSTICE

Antitrust Division

United States of America v. Medical Mutual of Ohio; Proposed

Final Judgment and Competitive Impact Statement

Notice is hereby given pursuant to the Antitrust Procedures and

Penalties Act, 15 U.S.C. Section 16 (b) through (h), that a proposed

Final Judgment, Stipulation and Competitive Impact Statement have been

filed with the United States District Court for the Northern District

of Ohio, in United States of America v. Medical Mutual of Ohio, Civil

Action No. 1:98-CV-2172. On Sept. 23, 1998, the United states filed a

Complaint against Medical Mutual of Ohio alleging that Medical Mutual

had unreasonably restrained competition in the greater Cleveland area

in violation of Section 1 of the Sherman Act, 15 U.S.C. 1. The proposed

Final Judgment, filed the same time as the Complaint, restrains Medical

Mutual from enforcing a Most Favored Rates requirement and from

requiring its participating hospitals in the Cleveland area to disclose

to Medical Mutual the rates such hospitals offer or charge any payers.

Copies of the Complaint, proposed Final Judgment and Competitive Impact

Statement are available for inspection at the Department of Justice in

Washington, DC in Room 400, 325 Seventh Street, NW., and at the Office

of the Clerk of the United States District Court for the Northern

District of Ohio, Ohio.

Public comment is invited within 60 days of the date of this

notice. Such comments, and responses thereto, will be published in the

Federal Register and filed with the Court. Comments should be directed

to Gail Kursh, Chief, Healthcare Task Force, 325 Seventh Street, NW.,

Room 404, Antitrust Division, Department of Justice, Washington, DC

20530, (telephone (202) 307-5799).

Rebecca P. Dick,

Director of Civil Non-Merger Enforcement.

Stipulation for Entry of Final Judgment

It is stipulated by and between the undersigned parties, by their

respective attorneys, that:

1. This Court has jurisdiction over the subject matter of this

action and over both of the parties, and venue of this action is proper

in the Northern District of Ohio.

2. The parties consent that a Final Judgment in the form attached

may be filed and entered by the Court, upon the motion of either party

or upon the Court's own action, at any time after compliance with the

requirements of the Antitrust Procedures and Penalties Act (15 U.S.C.

16), and without further notice to any party or other proceedings,

provided that Plaintiff has not withdrawn its consent, which it may do

at any time before the entry of the proposed Final Judgment by serving

notice thereof on Defendant and by filing that notice with the Court.

3. If Plaintiff withdraws its consent, or if the proposed Final

Judgment is not entered pursuant to the terms of this Stipulation, this

Stipulation shall be of no effect whatsoever, and the making of this

Stipulation shall be without prejudice to either party in this or in

any other proceeding.

4. Defendant agrees to be bound by the provisions of the proposed

Final Judgment pending its approval by the Court.

Dated: ________________.

[[Page 52765]]

For Plaintiff:

Joel I. Klein,

Assistant Attorney General.

Donna E. Patterson,

Deputy Assistant Attorney General.

Rebecca P. Dick,

Director of Civil Non-Merger Enforcement.

Gail Kursh,

Chief, Health Care Task Force.

David C. Jordan,

Assistant Chief, Health Care Task Force.

Paul J. O'Donnell,

Jean Lin,

Abdre Barlow,

Frederick Young,

Attorneys, Antitrust Division, Department of Justice, 325 7th Street,

NW., Washington, DC 20530, (202) 616-5933.

Emily M. Sweeney,

United States Attorney, Northern District of Ohio, 1800 Bank One

Center, 600 Superior Ave., E., Cleveland, Ohio 44114-2600, (216) 622-

3600.

For Defendant:

Wayne C. Dabb, Jr.,

Gerald A. Connell,

Baker & Hostetler, LLP, 3200 National City Center, 1900 East Ninth

Street, Cleveland, OH 44114-3485, (216) 621-0200.

Final Judgment

Plantiff, United States of America, filed its Complaint alleging

violations of Section 1 of the Sherman Act, 15 U.S.C. 1, on September

23, 1998. Plaintiff and Defendant, by their respective attorneys, have

consented to the entry of this Final Judgment without trail or final

adjudication of any issue of fact or law. This Final Judgment shall not

be evidence against any party or deemed an admission by any party of

any issue of fact or law, nor shall it be deemed a determination that

any violation of law has occurred. Therefore, before the taking of any

trial testimony, without trial of any issue of fact or law, and upon

consent of the parties, it is

Ordered, adjudged, and decreed, as follows:

I. Jurisdiction

This Court has jurisdiction over the subject matter of this action

and over each of the consenting parties. The Complaint states a claim

upon which relief may be granted under Section 1 of the Sherman Act, 15

U.S.c. 1.

II. Definitions

As used herein, the term:

(A) Cleveland Region means Ashtabula, Cuyahoga, Geauga, Lake,

Lorain, Medina, and Wayne Counties of the State of Ohio;

(B) Defendant of Medical Mutual means Medical Mutual of Ohio, is

subsidiaries, divisions, successors, assigns, and each other entity

directly or indirectly owned or controlled by it;

(C) Hospital means any entity in the Cleveland Region licensed to

provide acute care in-patient services;

(D) Hospital Agreement means any agreement between Medical Mutual

and a Hospital in the Cleveland Region for the provision of in-patient

or out-patient hospital services to Medical Mutual's subscribers, and

all amendments and additions to any such agreements;

(E) Most Favorable Rates Requirement means any policy, practice,

rule, or contractual provision which (1) requires a Participating

Hospital to charge any Third Party Payer as much as or more than the

rate charged to Medical Mutual by such Participating Hospital, or (2)

requires a Participating Hospital to charge Medical Mutual rates equal

to or lower than the lowest rate it charges any Third Party Payer;

(F) Participating Hospital means any Hospital in the Cleveland

Region that has entered into a Hospital Agreement with Medical Mutual;

(G) Third Party Payer means any non-governmental entity, other than

Medical Mutual, that pays for all or part of any expense for health

care services provided by a Hospital to another person or group of

persons.

III. Applicability

This Final Judgment applies to Medical Mutual and all other persons

(including all Participating Hospitals) in active concert or

participation with it who have received actual notice of the Final

Judgment by personal service or otherwise.

IV. Prohibited Conduct

Medical Mutual is enjoined and restrained from:

(A) Adopting, maintaining, or enforcing in the Cleveland Region a

Most Favorable Rates Requirement or any policy, practice, rule, or

contractual provision having the same purpose or effect;

(B) Adopting, maintaining, or enforcing any policy, practice, or

agreement that requires a Participating Hospital to disclose to Medical

Mutual, directly or indirectly, through audit or any other means, the

rates such Hospital offers or charges any Third Party Payer(s), except

as necessary for coordination of benefits in connection with specific

claims.

V. Permitted Activities

Provided that such activities do not violate any provision of

Section IV, nothing herein shall be construed to prohibit Medical

Mutual from:

(A) Negotiating for or obtaining rate arrangements, reimbursement

levels, or payment methodologies with any Participating Hospital,

whether on an overall or product line basis, including negotiating for

or obtaining the lowest rate(s) or largest discount(s) from any

Participating Hospital;

(B) Receiving or accepting information regarding the rates a

Hospital offers or charges any Third Party Payer so long as the

Hospital provides such information without any request from Medical

Mutual and without any offer or promise of consideration for such

information from Medical Mutual;

(C) Establishing preferred provider networks, other forms of

provider panels, or alternative delivery systems;

(D) Recruiting hospitals who have contracts with or are

participating in hospital networks or panels of Third Party Payers;

(E) Having different rate arrangements, reimbursement levels, or

payment methodologies for different product lines, for different

hospitals, or for different networks or panels of hospitals;

(F) Declining or refusing to contract or do business with any

hospital, or terminating any hospital agreement.

VI. Nullification

All Most Favorable Rates Requirements in the Cleveland Region are

hereby declared null and void and shall impose no obligation on any

Participating Hospital.

VII. Compliance Measures

Medical Mutual shall:

(A) Distribute, within 60 days of the entry of this Final Judgment,

a copy of this Final Judgment to: (1) all of Medical Mutual's officers

and trustees; and (2) all of Medical Mutual's employees and agents who

are responsible for negotiating, approving, disapproving, or enforcing

any Hospital Agreement, except employees and agents primarily involved

in the administration of payments to and collections from Hospitals;

(B) Distribute in a timely manner a copy of this Final Judgment to

any officer, trustee employee, or agent who succeeds to a position

described in Section VII(A);

(C) Obtain from each present of future officer, trustee, employee,

or agent designated in Section VII(A), within 60 days of entry of this

Final Judgment or of the person's succession to a designated position,

a written certification that he or she: (1) has read, understands, and

agrees to abide by the terms of this Final Judgment; and (2) has

[[Page 52766]]

been advised and understands that his or her failure to comply with

this Final Judgment may result in conviction for criminal contempt of

court;

(D) Maintain a record of persons to whom the Final judgment has

been distributed and from whom, pursuant to Section VII(C), the

Certification has been obtained;

(E) Distribute, within 60 days of the entry of this Final Judgment,

a copy of this Judgment, by first-class mail, to all currently

Participating Hospitals;

(F) Provide a copy of this Final Judgment to any Hospital in the

Cleveland Region not covered by Section VII(E) with which Medical

Mutual enters into negotiations for a Hospital Agreement after the

effective date of this Judgment;

(G) Promptly report to the Plaintiff any violation of the Final

Judgment.

VIII. Certification

(A) Within 75 days of the entry of this Final Judgment, Medical

Mutual shall certify to the Plaintiff that it has: (1) distributed the

Final Judgment in accordance with Section VII(A) and (E); and (2)

obtained certifications in accordance with Section VII(C).

(B) For ten years after the entry of this Final Judgment, on or

before its anniversary date, Medical Mutual shall file with the

Plaintiff an annual Declaration as to the fact and manner of its

compliance with the provisions of Sections IV, VI, and VII.

IX. Plaintiff's Access to Information

(A) To determine or secure compliance with this Final Judgment,

duly authorized representatives of the Plaintiff, upon written request

of the Assistant Attorney General in charge of the Antitrust Division,

and on reasonable notice to Medical Mutual made to its principal

office, shall be permitted, subject to any legally recognized

privilege:

(1) Access during Medical Mutual's office hours to inspect and copy

all documents in the possession or under the control of Medical Mutual,

which may have counsel present, relating to any matters contained in

this Final Judgment; and

(2) Subject to the reasonable convenience of Medical Mutual and

without restraint or interference from it, to interview officers,

trustees, employees, or agents of Medical Mutual, who may have Medical

Mutual's counsel and/or their own counsel present, regarding such

matters.

(B) Upon the written request of the Assistant Attorney General in

charge of the Antitrust Division made to Medical Mutual's principal

office, Medical Mutual shall submit such written reports, under oath if

requested, relating to any matters contained in this Final Judgment as

may be reasonably requested, subject to any legally recognized

privilege.

(C) Medical Mutual shall have the right to be represented by

counsel in any process under this Section.

(D) No information or documents obtained by the means provided in

Section IX shall be divulged by the Plaintiff to any person other than

duly authorized representatives of the Executive Branch of the United

States, except in the course of legal proceedings to which the United

States is a party, or for the purpose of securing compliance with this

Final Judgment, or as otherwise required by law.

(E) If at the time information or documents are furnished by

Medical Mutual to Plaintiff, Medical Mutual represents and identifies

in writing the material in any such information or documents to which a

claim of protection may be asserted under Rule 26(c)(7) of the Federal

Rules of Civil Procedure, and Medical Mutual marks each pertinent page

of such material, ``subject to claim of protection under Rule 26(c)(7)

of the Federal Rules of Civil Procedure,'' then 10 days notice shall be

given by Plaintiff to Medical Mutual prior to divulging such material

in any legal proceeding (other than a grand jury proceeding) to which

Medical Mutual is not a party.

(F) Nothing in this Final Judgment prohibits the Plaintiff from

using any other investigatory method authorized by law.

X. Further Elements of the Final Judgment

(A) This Final Judgment shall expire ten years from the date of its

entry.

(B) Jurisdiction is retained by this Court for the purpose of

enabling either of the parties to this Final Judgment, but no other

person, to apply to this Court at any time for further orders and

directions as may be necessary or appropriate to carry out or construe

this Final Judgment; to modify or terminate any of its provisions,

based on changed circumstances of fact or law warranting such action;

to enforce compliance; or to punish violations of its provisions.

(C) The Court finds that this Final Judgment is in the public

interest.

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United States District Judge

Dated: ________________.

Competitive Impact Statement

Pursuant to Section 2(b) of the Antitrust Procedures and Penalties

Act, 15 U.S.C. 16(b)-(h), the United States submits this Competitive

Impact Statement to provide the information necessary to enable the

Court and the public to evaluate the proposed Final Judgment that the

parties have jointly filed.

I. Nature and Purpose of This Proceeding

Simultaneous with the filing of this Statement, the United States

filed a civil antitrust complaint against Medical Mutual of Ohio

(``Medical Mutual''), the largest health care insurer in Ohio, for

unreasonably restraining competition in the hospital services and

commercial health plan markets in violation of Section 1 of the Sherman

Act, 15 U.S.C. 1. The Complaint alleges that for over ten years Medical

Mutual required that any hospital wishing to do business with it in the

``Cleveland Region,'' a seven-county area consisting of Cuyahoga,

Ashtabula, Geauga, Lake, Lorain, Medina, and Wayne Counties, agree to a

``Most Favorable Rates'' (``MFR'') clause; that this MFR clause had the

effect of requiring those hospitals to charge Medical Mutual's

competitors significantly more than they charged Medical Mutual or pay

substantial penalties; that the MFR clause stifled the development of

innovative and less costly health plans; and that, as a result,

businesses and consumers in the Cleveland Region paid higher than

competitive prices and were deprived of innovative and less costly

alternatives for health care services.

The parties have stipulated that the proposed Final Judgment may be

entered after compliance with the requirements of the Antitrust

Procedures and Penalties Act (15 U.S.C. 16), and that Medical Mutual

shall be bound by the provisions of the proposed Final Judgment pending

the Court's approval. The parties also agreed that the United States

may withdraw its consent at any time prior to the entry of the Final

Judgment by serving notice of that withdrawal on Medical Mutual and by

filing that notice with the Court. Entry of the proposed Final Judgment

will terminate this action, except that the Court will retain

jurisdiction over the matter for any further proceedings that may be

required to interpret, enforce, or modify the Judgment or to punish

violations of any of its provisions. This Court is required by 15

U.S.C. 16(e) to determine whether the proposed Final Judgment is in the

public interest.

II. Practices Giving Rise to the Alleged Violation

Medical Mutual, a non-for-profit mutual insurance company organized

[[Page 52767]]

under Ohio law, is by far the largest commercial health care insurer in

the Cleveland Region. With more than 730,000 enrollees there, it covers

approximately 36% of the commercially insured population and is roughly

twice the size of its closest competitor. Medical Mutual also accounts

for approximately 25 to 30% of commercial payments to local hospitals,

and nearly all of these hospitals depend on Medical Mutual for the

largest share of their commercial business.

A. Medical Mutual's MFR Clause

Starting in 1986, Medical Mutual required a MFR clause as a

precondition for entering into an agreement with any hospital in the

Cleveland Region. Those provisions, in effect, compelled the hospitals

to charge non-governmental health plans with a lower total dollar

volume of business than Medical Mutual rates equal to or greater than

the rates the hospital charged Medical Mutual. Not content with

ensuring that it had the best rate, Medical Mutual--through its MFR

clause--also required that the hospitals maintain certain percentage

differentials between the rates charged Medical Mutual and all other

smaller commercial payers. Those differentials provided Medical Mutual

with a cost advantage of 15-30% over its competitors in the purchase of

hospital services.

Medical Mutual's MFR clause created such rate differentials in

several ways. First, it required that the hospitals charge all other

payers with less volume at the hospital at least as much as they

charged Medical Mutual for services to Medical Mutual's indemnity

subscribers. Since Medical Mutual typically paid hospitals 15-20% less

for services provided to its managed care subscribers, pegging the MFR

clause to its indemnity prices automatically gave Medical Mutual a

substantial cost advantage over its managed care competitors. In

effect, the MFR created a buffer of at least 15-20% between Medical

Mutual's managed care costs and the managed care costs of its rivals.

Second, starting in 1990, Medical Mutual began insisting that the

hospitals charge all other health plans 1-10% more than they charged

Medical Mutual for its indemnity plan. This requirement not only

protected Medical Mutual's indemnity plan against competition, but also

further widened the cost differential between Medical Mutual's managed

care plans and those of its rivals. Hospitals were required to charge

rival payers up to 30% more than they charged Medical Mutual for the

same services.

Finally, while Medical Mutual reluctantly agreed in certain

instances to a ``like-product'' MFR clause in which rates were compared

on a product-line basis (indemnity to indemnity, managed care to

managed care), it still sought to retain the cost advantage that the

traditional MFR clause had given it. It did so by explicitly requiring

hospitals with such agreements to charge all other plans with less

total volume 10-15% more than they charged Medical Mutual.

B. Medical Mutual's Enforcement of the MFR Clause

Medical Mutual vigorously enforced its MFR clause--and the rate

differentials--with the express purpose of protecting Medical Mutual

against competition and significantly raising its competitor's hospital

costs. Typically, if a rival player received discounts greater than

those given to Medical Mutual, the auditor would multiply the

percentage difference by Medical Mutual's total payments to that

hospital. Thus, a rate 10% lower than Medical Mutual's would yield a

$200,000 penalty if Medical Mutual's total business for the relevant

contract year at that hospital was as little as $2 million. As Medical

Mutual accounted for the largest share of nearly every hospital's

commercial business--dwarfing the volume of most other payers in the

market--the MFR penalties could be quite large and were often grossly

disproportionate to the benefit received by the rival plan, i.e., the

amount that would have allowed the hospital to avoid violating the MFR

provision.\1\

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\1\ For example, in 1991, Medical Mutual assessed a penalty of

$342,916 against St. John West Shore Hospital for giving a rival

payer a discount below Medical Mutual totaling $13,831; and in 1992,

it assessed a penalty of $417,373 against Fairview Hospital System

(then known as HealthCleveland) for giving a different rival payer a

discount below Medical Mutual's rates totaling $30,781.

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Even more significant was Medical Mutual's requirement that MFR

compliance audits be conducted retrospectively--i.e., after the other

payers had reimbursed the hospital for its enrollees' claims. Concerned

about the ability of competitors to lower their hospital costs through

better management of hospital services, Medical Mutual decided--despite

protests of unfairness by both hospitals and its own consultants--that

the auditor was to determine the rates charged other payers, and thus

violations of the MFR clause, retrospectively, i.e., it was to look at

actual reimbursement levels and not the contractual rate. By doing so

it was able to impose penalties in those situations where the

contractual discounts did not violate the MFR clause but where the

effective discount, after factoring case mix and utilization

management, was below the MFR rate. As one hospital complained to

Medical Mutual: ``[under] this clause we could find ourselves in

violation of the Favored Nations provision if a per diem payer through

strong utilization review efforts reduced their length of stay and also

their aggregate payments.'' In effect, the hospital would be penalized

for a rival payer's greater efficiency.

C. Anticompetitive Effects of Medical Mutual's MFR Clause

As alleged in detail in the Complaint, Medical Mutual's MFR

provision harmed competition and reduced consumer welfare in the

hospital services and hospital insurance markets in the Cleveland

Region by increasing the costs of hospital services for other plans,

businesses, and consumers, and by discouraging innovation in the design

of health insurance plans and the delivery of hospital services.

1. Medical Mutual's MFR Provision Substantially Increased the Cost of

Hospital Services for Rival Plans

Because the MFR provisions required that hospitals charge Medical

Mutual's competitors substantially more than they charged Medical

Mutual or suffer significant penalties, various hospitals and hospitals

systems, including MetroHealth, the Cleveland Clinic, University,

Meridia, Lake, Marymount, Southwest General, Mt Sinai, and Fairview,

were deterred from offering significant additional discounts--discounts

up to 20% or more--to competing health plans. The result has been to

increase the cost of hospital services to Medical Mutual's rivals and,

ultimately to consumers.\2\

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\2\ Indeed, where the MFR clause has been inapplicable--whether

due to an exemption or for some other reason--hospitals have

demonstrated a willingness to give lower rates to Medical Mutual's

rivals. Thus, when Kaiser Permanente became the largest payer at the

Cleveland Clinic in 1994, and therefore exempt from the MFR

provision, its per case rate for cardiac services alone declined by

$2,000. Similarly, when Total Health Care and other payers handling

Medicare and Medicaid enrollees obtained an exemption from the MFR

clause, University Hospital and MetroHealth gave those plans rates

below the MFR rate. Starting in 1996, when it entered the Medicaid

and Medicare market, Medical Mutual stopped granting such exemptions

and, as a result, those plans have been required to pay higher rates

for hospital services.

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In addition, Medical Mutual's aggressive enforcement of the MFR

clause discouraged hospitals from offering rates to rival plans even

approaching the MFR rate. Since the differences between payment

methods,

[[Page 52768]]

patient mix, and case management, combined with Medical Mutual's

retrospective review of actual reimbursement levels, made it difficult,

if not impossible, for a hospital to accurately predict whether a

contract would violate the MFR clause, hospitals simply refused to

price anywhere near the MFR rate, routinely demanding rates from rival

plans significantly above the MFR rate in order to protect against what

could be a financially devastating penalty.

2. Hospitals and Rival Plans Entered Into Costly Contractual

Arrangements Designed to Avoid Medical Mutual's MFR Provision

In addition to discouraging hospitals from offering favorable

prices to rival payers. Medical Mutual's MFR clause forced hospitals to

manipulate their contractual arrangements with other payers to avoid

incurring a MFR penalty. The effect was to increase the cost of

hospital services to Medical Mutual's competitors and ultimately to

consumers.

For example, some hospitals insisted on using `'stop-loss''

provisions in their contracts with other payers to avoid MFR penalties.

These clauses typically required their party payers to reimburse the

hospital at a specified percentage of charges for claims that lay

outside predetermined thresholds. MetroHealth Hospital, for example,

insisted on such MFR-related ``stop-loss'' provisions in 90% of its

contracts. University Hospital and Fairview Health System have similar

provisions in a number of their contracts as well.\3\ The additional

costs due to these stop-loss provisions were borne by Medical Mutual's

competitors and, ultimately, by the consumer.

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\3\ Even those hospitals that would have insisted on ``stop-

loss'' provisions were there no MFR clause (to avoid the financial

risk associated with catastrophic or high acuity cases) demanded

lower ``stop-loss'' thresholds because of the MFR clause. By

lowering the ``stop-loss'' threshold, the hospital ensured that more

services were priced above the competitive rate--increasing the

total cost of hospital care. For example, the Columbia/HCA hospitals

(St. Vincent Charity Hospital, St. Luke's Medical Center, and St.

John Westshore Hospital) would have agreed to higher ``stop-loss''

thresholds but for the MFR provisions.

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Similary, some hospitals required payers to make payments over and

above contracted rates to avoid a MFR penalty or to reimburse the

hospital for any penalty incurred due to the MFR clause. Both

mechanisms had the effect of raising the costs of Medical Mutual's

rivals and, ultimately, to consumers. For example, Mt. Sinai Medial

Center and CIGNA entered into ``reconciliation agreements'' beginning

in 1992 which required CIGNA to reimburse Mt. Sinai any amounts

necessary to avoid a MFR violation. CIGNA made retrospective payments

to Mt. Sinai of over $600,000 for the years 1990-1992 alone so that Mt.

Sinai could avoid over $4 million in MFR penalties that it would

otherwise have owed to Medical Mutual.

Nor was Mt. Sinai the only hospital to do so. The Cleveland Clinic

has a reconciliation agreement with Kaiser in the event its volume ever

falls below Medical Mutual's volume. MetroHealth demanded that various

payers, including Prudential, Aetna, QualChoice, and Personal Physician

Care, make additional payments if MetroHealth's own MFR audit suggested

a violation. Meridia Health System required some payers to reimburse if

for any amount paid for a MFR violation University Hospital's contracts

with Prudential required Prudential to make additional payments of

$409,232.82 in 1996 alone.

Hospitals also demanded to re-negotiate existing agreements when

faced with potential MFR violations. MetroHealth Hospital, for

instance, requested HealthStar to re-negotiate rates in the midst of

its 1993-94 contract because the patient mix was not as anticipated and

would have caused a MFR violation, and required that Aetna agree to re-

negotiate its rates if a MFR violation appeared likely. Southwest

General increased Emerald's inpatient reimbursement in the middle of

its contact period in 1993 and in 1995 demanded to re-negotiate several

contracts, including the contract with HMO Aetna, to avoid a MFR

violation. In 1995, the Cleveland Clinic re-negotiated Aetna's contract

because the Clinic's new contract with Medical Mutual generated a

higher MFR benchmark, one requiring a 20% increase in Aetna's inpatient

rates. Still other examples include Lake Hospital demanding that CIGNA

re-negotiate its contract after lake paid a $225,000 MFR pentaly;

Meridia Health System terminating a contract with Affordable Health and

re-negotiating a new contract of substantially higher rates after

having been found in violation of the MFR provisions; and Meridia

entering into an agreement with United HealthCare requiring the latter

to re-negotiate its rates if the MFR clause was violated.

Finally, some hospitals simply terminated contacts with other

payers when they were unable to re-negotiate terms: thus, Southwest

General terminated its 1994 contract with CIGNA for behavioral services

after it learned from Medical Mutual's auditor that CIGNA's 1992

contract violated the MFR clause and CIGNA refused to re-negotiate'

Lake Hospital terminated its contract with Prudential because of the

MFR and lost is contract with CostLogics after a 1992 MFR audit

prompted lake to request a substantial rate increase; Lakewood lost its

HMO Agreement with Metlife in 1992 because of the MFR; and University

Hospital and Mutual of Omaha agreed to higher rates when Mutual of

Omaha declined University's proposal to incorporate a reconciliation

provision in their contract.

Medial Mutual has been well aware of the significant effect the MFR

had on its rivals's costs, the demands by hospitals for retroactive

payments from its rivals, the re-negotiation of contracts to increase

existing rates, and even the termination of such contracts. Indeed, its

recent contracts expressly provide that the hospital may elect, in

order to avoid a violation of the MFR provision, to terminate, modify,

or amend its contract with the other payer. The MFR's purpose and clear

effect has been to increase the costs paid by other plans and,

ultimately, by the consumer.

3. Medical Mutual's MFR Provision Hindered Innovation in the Delivery

of Health Care Insurance

Medical Mutual's MFR provision also discouraged the development of

innovative approaches to the efficient delivery of health insurance,

particularly new contracting methodologies and novel health plan

designs. Confronted by the threat posed by rival payers willing to

invest in additional tools and resources to provide more efficient and

better quality health care plans, Medical Mutual, through its MFR

clause, required that all payers, regardless of utilization management,

case mix, or other factors, pay a hospital at least as much or more

than Medical Mutual for similar services. It a hospital's actual price

to another payer was below the MFR benchmark for any reason, including

more efficient management, Medical Mutual would assess a penalty

against the hospital. The result was to force hospitals to raise all

rates to Medical Mutual's level (or above), removing the principal

incentive for other payers to invest in more efficient case management.

Unable to obtain the benefits of more efficient case management, rival

payers declined to invest in less costly methods and consumers were

deprived of the choice of alternative plans.

Medical Mutual's MFR provisions also created a significance

disincentive to the development of low-cost, narrow-panel health care

plans in the Cleveland Region, thus depriving consumers of the choice

of such plans. By limiting its

[[Page 52769]]

enrollees to fewer hospitals, a small-panel plan provides higher volume

to each of the participating hospitals in exchange for more aggressive

discounts from the hospitals. In the Cleveland Region, however, Medical

Mutual's MFR clause discouraged hospitals from offering a discount

large enough to make such plans marketable.

Medical Mutual's MFR provisions also discouraged the use of

``carve-out'' contracts--contracts of such speciality services as

obstetrics, organ transplants, or invasive cardiology. These specialty

contracts can reduce hospital costs for payers and consumers by

allowing a payer to contracts for those services in which the hospital

has developed a particular expertise and by allowing the hospital to

more efficiently use its resources. Medical Mutual's MFR provisions,

however, discouraged hospitals in the Cleveland Region from entering

into such specialty contracts by requiring that those payers be charged

at least as much as Medical Mutual for such services. For examples,

both University Hospital and the Cleveland Clinic requested exemptions

from the MFR clause in order to enter into such carve-out contracts.

University for both soft tissue transplant and obstetrics services; the

Clinic for certain cardiology services. Medical Mutual refused them

both, and neither participated in the program because of the

significant penalties they would have incurred.

III. Explanation of the Proposed Final Judgment

The parties have stipulated that the Court may enter the proposed

Final Judgment after compliance with the Antitrust Procedures and

Penalties Act, 15 U.S.C. 16(b)-(h).

A. Scope of the Proposed Final Judgment

Section III of the proposed Final Judgment provides that the Final

Judgment shall apply to Medical Mutual and all other persons (including

Medical Mutual's Participating Hospitals \4\) in active concert or

participating with it who shall have received actual notice of the

Final Judgment by personal service or otherwise.

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\4\ Participating Hospitals are all hospitals in the Cleveland

Region that have hospital agreements with Medical Mutual.

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B. Prohibitions and Obligations

Section IV sets forth the conduct prohibited by the Final

Judgment.\5\ Section IV(A) enjoins and restrains Medical Mutual from

adopting, maintaining, or enforcing for the next ten years a Most

Favorable Rates Requirement, defined as any policy, practice, rule, or

contractual provision which (1) requires a Participating Hospital to

charge any third party payer as much as or more than the rate charged

to Medical Mutual by such Participating Hospital, or (2) requires a

Participating Hospital to charge Medical Mutual rates equal to or lower

than the lowest rate it charges any third party payer. Section IV(A)

further enjoins and restrains Medical Mutual for a similar period from

adopting, maintaining, or enforcing any policy, practice, rule, or

contractual provision having the same purpose or effect.

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\5\ While the relief here is limited to the Cleveland Region,

the proposed Final Judgment does not foreclose the United States

from investigating and subsequently seeking relief for comparably

anticompetitive conduct by Medical Mutual in other geographic areas.

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Section IV(B) enjoins Medical Mutual from adopting, maintaining, or

enforcing any policy, practice or agreement that requires a hospital to

disclose to Medical Mutual directly or indirectly the rates such

hospital offers or charges any other commercial payer. This section is

intended to prevent Medical Mutual from achieving an effect comparable

to that of the MFR clause by compelling hospitals to disclose

information to it or its agents regarding the rates the hospitals

charge other payers.

Section V lists various activities Medical Mutual may engage in so

long as they do not violate the prohibitions of Section IV in doing so.

These activities include negotiating rate arrangements and payment

methodologies with hospitals, receiving information about rates charged

others under certain conditions, establishing provider networks,

recruiting hospitals participating in other plans, having different

reimbursement levels for different participating hospitals or panels,

and terminating or refusing to contract with hospitals. All such

activities are specifically made subject to the prohibitions of Section

IV so that they not become surrogates for the MFR clause.

More specifically, Section V(A) permits Medical Mutual to negotiate

for or obtain the lowest rate(s) or largest discount(s) from any

participating hospital whether on an overall or product line basis.

Consistent with Section IV(A)'s prohibition against Medical Mutual's

requiring or compelling a hospital to give it the lowest rates, this

section allows Medical Mutual to use it bargaining skills to obtain the

lowest rates, this section allows Medical Mutual to use its bargaining

skills to obtain the lowest rate. In addition, Section V(B) permits

Medical Mutual to receive rate information from a Participating

Hospital when the provision of such confidential information is purely

voluntary and not the result of a bargain. Since the disclosure of any

rate information, if coerced or purchased, may affect a hospital's

willingness to discount, Section V(B) together with Section IV(B) make

clear that Medical Mutual cannot request that a hospital disclose the

rates it charges other payers, cannot compel a hospital to disclose

such rates, and cannot offer consideration for such information.

Sections IV(C) and (D) specifically allow Medical Mutual to establish

preferred provider networks or alternative delivery systems, to recruit

hospitals who have contracts with other payers, and to have different

rate arrangements or payment methods for different product lines,

hospitals or networks. These activities are least likely to violate the

prohibitions of Section IV. Finally, in Section V(F), Medical Mutual is

permitted to decline or to refuse to contract or do business with any

hospital or terminate any hospital agreement. As with the rest of

Section V, however, Section V(F) is permitted only to the extent it

does not violate the prohibitions of Section IV. Thus, for example,

while Medical Mutual may be permitted to terminate a hospital

agreement, the grounds for doing so cannot violate Section IV.

Section VI of the Final Judgment declares all Medical Mutual's MFR

provisions null and void, making it clear that no Most Favorable Rates

Requirement imposes any obligation on any of Medical Mutual's

Participating Hospitals in the Cleveland Region.

Section VII of the Final Judgment sets forth various compliance

measures. Section VII(A) requires Medical Mutual to distribute, within

60 days of the entry of the Final Judgment, a copy of the Final

Judgment to: (1) all Medical Mutual officers and trustees; and (2) all

Medical Mutual employees and agents who are responsible for

negotiating, approving, disapproving, or enforcing any of Medical

Mutual's hospital agreements with Participating Hospitals, excepting

only those employees and agents primarily involved in the

administration of payments to and collections from hospitals. Sections

VII(B)-(D) require Medical Mutual to provide a copy of the Final

Judgment to persons who succeed to the positions of those covered by

VII(A), and to obtain and maintain records of present and future

officers', trustees', agents', and

[[Page 52770]]

employees' written certifications that they have read, will abide by,

and understand the consequences of their failure to comply with the

terms of the Final Judgment. Sections VII(E) and (F) require Medical

Mutual to distribute a copy of the Final Judgment to all currently

Participating Hospitals and all other hospitals who enter into

negotiations with Medical Mutual for a hospital agreement after the

entry of the Final Judgment. Finally, Section VII(G) obligates Medical

Mutual to report to the United States any violation of the Final

Judgment.

Section VIII obligates Medical Mutual to certify its compliance

with the requirements of Section IV, VI, and VII of the Final Judgment.

In addition, Section IX sets forth a series of measures by which the

Plaintiff may have access to information needed to determine or secure

Medical Mutual's compliance with the Final Judgment. Section X limits

the term of the Final Judgment to ten years.

C. Entry of the Proposed Final Judgment Is in the Public Interest

Section 2(e) of the Antitrust Procedures and Penalties Act, 15

U.S.C 16(e), requires that the Court's entry of the proposed Final

Judgment be in the public interest. The Act permits a court to

consider, among other things, the relationship between the remedy

secured and the specific allegations set forth in the government's

complaint, whether the decree is sufficiently clear, whether

enforcement and compliance mechanisms are adequate, whether the decree

may harm third parties. See United States v. Microsoft Corp., 56 F.3d

1448, 1461-62 (D.C. Cir. 1995). Consistent with Congress' intent to use

consent decrees as an effective tool of antitrust enforcement, the

Court's function is ``not to determine whether the resulting array of

rights and liabilities is the one that will best serve society, but

only to confirm that the resulting settlement is within the reaches of

the public interest.'' Id at 1460 (internal quotations omitted); see

also United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.),

cert. denied, 454 U.S. 1083 (1981). The United States submits that

entry of this proposed Final Judgment is in the public interest because

it addresses the anticompetitive effects alleged in the Complaint and

forecloses Medical Mutual from achieving the MFG clause's

anticompetitive effects in other ways.

More specifically, by nullifying Medical Mutual's MFR clause and

enjoining any policy, practice or rule having the same purpose or

effect under Section IV(A), the proposed Final Judgment will ensure

unrestrained price competition between Medical Mutual and other health

insurance plans and among hospitals in the Cleveland area. Without a

price floor set by MFR clauses or other similar provisions, hospitals

will have a greater incentive to discount, thereby lowering health care

costs for consumers as well as encouraging more innovation in the

delivery of health care services. In addition, Section IV(B) restricts

Medical Mutual's ability to compel from its Participating Hospitals, or

bargain for, information on the rates the hospitals charge other

payers, ensuring that Medical Mutual does not indirectly impose a MFR

provision.

Finally, Section V of the proposed Final Judgment allows Medical

Mutual to continue to compete on largely the same terms as other health

insurance plans. Medical Mutual will not be restricted from negotiating

different rate arrangements for different hospitals, establishing

preferred provider networks or other forms of provider panels,

recruiting hospitals who are participating in other provider panels, or

even receiving rate information from its participating hospitals when

the disclosure of such information is purely voluntary.

D. Medical Mutual's Voluntary Termination of the MFR Clause Does Not

Eliminate the Need for Injunctive Relief

Despite Medical Mutual's recent promise to cease enforcing its MFR

provisions and terminate the MFR audits, there is substantial

likelihood of future violations of the antitrust laws and recurring

harm to consumers in the absence of an harm injunction. In the absence

of an injunction, Medical Mutual's promise is not enforceable, and

nothing prevents Medical Mutual from reneging at any time, a

possibility made more probable by its apparently strongly held belief

that its conduct was lawful.\6\ See United States v. Cleveland Trust

Co., 393 F. Supp. 699, 710 (N.D. Ohio, 1974)

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\6\ In its challenge to the Civil Investigative Demand issued to

it in 1995, Medical Mutual, then known as Blue Cross and Blue Shield

of Ohio, vigorously contended that its conduct could not be

investigated as it was procompetitive as a matter of law. The Court

(Aldrich, J) soundly rejected that position in Blue Cross and Blue

Shield of Ohio v. Bingaman, 1996 WL 677094 (N.D. Ohio), 1996-2 Trade

Cas. 71600, aff'd, 113 F.3d 1420 (Table, text at 1997 WL 400095)

(6th Cir. 1997).

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In addition, Medical Mutual has clearly not precluded itself from

instituting schemes short of reinstituting the MFR provision, schemes

which could include auditing participating hospitals to determine other

payers' rates or simply requiring the hospitals to disclose the rates

they charged other payers, and then demanding comparable or lower

rates. Given Medical Mutual's high market share in the Cleveland area

relative to other payers and thus its correspondingly significant

bargaining power, all of those arrangements, contractual or otherwise,

are real options for Medical Mutual, and if implemented, could have the

similar anticompetitive effects of deterring hospitals from discounting

to other payers or participating in more innovative and efficient

health care delivery systems.

Moreover, injunctive relief is particularly appropriate in this

instance because Medical Mutual's voluntary abandonment was clearly

occasioned by the government's then-imminent enforcement action. If an

antitrust defendant is allowed to simply abandon its challenged conduct

on the eve of a government action, then the enforcement of antitrust

laws by the United States would be significantly hampered. United

States v. W.T. Grant Co., 345 U.S. 629, 632 (1953). A trial court's

wide discretion ``is not to be exercised to deny relief altogether by

lightly inferring an abandonment of the unlawful activities from a

cessation which seems timed to anticipate suit.'' United States v.

Parke, Davis & Co., 362 U.S. 29, 48 (1960).

IV. Alternatives to the Proposed Final Judgment

An alternative to the proposed Final Judgment would be a full trial

on the merits of the case, which would involve substantial time and

expense to the United States and Medical Mutual and create uncertainty

in the ultimate relief to be obtained by the United States. A trial is

also undesirable because the United States believes that the proposed

Final Judgment fully remedies the violations of the Sherman Act alleged

in the Complaint.

The United States considered a claim for treble damages arising

from overcharges the United States paid for the health insurance of

federal employees in the Cleveland Region. Because Medical Mutual's use

of a MFR clause had artificially inflated the cost of health insurance

of the Cleveland Region, it similarly increased the amount of

contribution the United States paid on behalf of its employees through

the Federal Employees Health Benefit Program (``FEHBP'') to rival

health plans in Cleveland.

However, in light of the costs and delay associated with litigation

necessary to secure damages, and the fact that payments by the United

States

[[Page 52771]]

for its employees' health insurance constitute only a modest percentage

of the total health insurance cost in the Cleveland area, it was

determined that the time and resources required to pursue damages were

unwarranted. Moreover, private litigants, such as competing health

plans, may be in position to pursue damages claims against Medical

Mutual. Should health plans whose enrollees include federal employees

succeed in recovering damages from Medical Mutual, such recovery would

also likely be passed on to the United States in the form either of

rebates under the cost-plus provisions of such contracts or through

lower premiums. The United States concluded, therefore, that the public

interest is better served by securing the immediate, certain, and

substantial relief set forth in the proposed Final Judgment without

pursuing a damages claim.

V. Remedies Available to Private Litigants

Section 4 of the Clayton Act, 15 U.S.C. 15, provides that any

person who has been injured as a result of conduct prohibited by the

antitrust laws may bring suit in federal court to recover three times

the damages suffered, as well as costs and reasonable attorney's fees.

Entry of the proposed Final Judgment will neither impair nor assist in

the bringing of such actions. Under the provisions of Section 5(a) of

the Clayton Act, 15 U.S.C. Sec. 16(a), the Final Judgment has no prima

facie effect in any subsequent lawsuits that may be against Medical

Mutual in this matter.

VI. Procedures Available for Modification of the Proposed Final

Judgment

As provided by the Antitrust Procedures and Penalties Act, any

person believing that the proposed Final Judgment should be modified

may submit written comments to Gail Kursh, Chief, Health Care Task

Force; Department of Justice; Antitrust Division; 325 7th Street, N.W.;

Room 404; Washington, D.C. 20530, within the 60-day period provided by

the Act. Comments received, and the Government's responses to them,

will be filed with the Court and published in the Federal Register. All

comments will be given due consideration by the Department of Justice,

which remains free, pursuant to Paragraph 2 of the Stipulation, to

withdraw its consent to the proposed Final Judgment at any time before

its entry if the Department should determine that some modification of

the Judgment is necessary to protect the public interest. The proposed

Final Judgment itself provides that the Court will retain jurisdiction

over this action, and that the Parties may apply to the Court for such

orders as may be necessary or appropriate for the modification,

interpretation, or enforcement of the Judgment.

VII. Determinative Documents

No materials and documents of the type described in Section 2(b) of

the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b), were

considered in formulating the proposed Final Judgment. Consequently,

none are filed herewith.

Dated: ________________.

Respectfully submitted,

Paul J. O'Donnell

Jean Lin

Andre Barlow

Frederick S. Young,

Attorneys, Antitrust Division, U.S. Department of Justice, 325 7th

Street, N.W., Washington, D.C. 20530, (202) 616-5933.

[FR Doc. 98-26034 Filed 9-30-98; 8:45 am]

BILLING CODE 4410-11-M